Thanks to relocating businesses and residents from coastal metros, the Twin Cities housing market has recorded healthy fundamentals in recent months. However, the growing activity also put more pressure on the metro’s affordable housing stock. According to Dr. Eric Anthony Johnson, president & CEO of Aeon, every corner of Minnesota needs additional affordable housing, from urban cores to suburbs and beyond.
“Incomes are not keeping pace with the rising cost of housing, and it’s difficult to find the resources to mitigate the housing crisis,” he said.
Recently, Johnson assumed the helm at Aeon, a nonprofit developer, owner and manager of affordable housing in Twin Cities. He’s taken over the leadership role from Alan Arthur, who served as the organization’s president & CEO for 33 years. In the interview below, Johnson talks about the challenges of building affordable housing across Twin Cities, but also touches on ways to protect the metro’s existing affordable housing stock.
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What are your priorities in your new role at Aeon?
Johnson: To build on the success of Aeon as a developer that’s not afraid to take on challenging affordable housing issues. I believe we can continue the great work by developing and implementing a powerful 10-year strategic plan focused on developing and preserving more than 10,000 units over the next 10 years.
What can you tell us about Aeon’s philosophy when it comes to developing and operating affordable housing communities?
Johnson: It’s very simple: creating a home for individuals and families that need access to quality housing that meets them where they are financially.
Local and state lawmakers are working on implementing policy changes to stimulate housing development. What policy changes could spur affordable housing development the most?
Johnson: We need access to lower-cost capital, aligned financing, zoning that supports the creation of affordable housing, and development tools and regulatory relief from cities. All of these things can spur and support the production of affordable housing.
Do you expect to see positive changes in terms of new housing policies in the near term?
Johnson: I believe we are at the beginning of understanding that what we have been doing in terms of housing policy is not matching the reality of the housing needs across American communities. Once we get greater clarity related to how huge the disconnect between incomes and housing costs is, and how it impacts our communities from an economic perspective, I believe we will start to see a shift in housing policy.
Tell us about the affordable housing projects you’re currently working on across Twin Cities. What makes these projects stand out?
Johnson: We recently opened a new property with 172 homes in Bloomington, and we opened another property with 70 homes in Edina at the end of March. Soon, we will break ground on the renovation and addition to a property in Brooklyn Center that will have 171 units when complete, and we have recently been awarded funding by Minnesota Finance for two properties with a combined 162 units in downtown St. Paul and Big Lake, Minn.
What this tells us is that every corner of our state needs more affordable housing—the urban core, the suburbs, the exurbs and beyond. All these properties include homes for the lowest-income households, many of whom have experienced long-term homelessness or other challenges that require supportive services. While funding for the development of these homes is critical, it is also important to have long-term and predictable funding for the supportive services residents need to thrive.
How has the pandemic influenced the way you approach affordable housing development?
Johnson: Along with our funders and other stakeholders, we strive to innovate at every step. From big changes like the way we underwrite reserves, operating calculations and construction pricing, to little things, like how we needed to quickly adapt approval and closing processes with public bodies that have statutory requirements. We have been challenged by the uncertainty and speed of change that has been occurring. Yet, we and our investors and community partners rose to the challenge because COVID-19, together with the reckoning of pervasive social and racial injustices, placed a spotlight on the importance of having a home.
This unprecedented time made it clear that housing is part of our public health system, an extension of our schools, and critical to allowing a large swath of our workforce to continue to work. More people and organizations are engaging in the conversation about needing to solve our housing crisis.
How are you dealing with issues related to supply shortages and rising construction costs?
Johnson: This has been an incredibly challenging dynamic. We have used contingencies and reserves to cover costs and, in some cases, lent organizational money to projects. As long-term owners, we will recoup these dollars even if it takes a full life cycle for the property. We also have so much gratitude for Hennepin County and others who have provided grant funds to assist with cost overruns.
In order to reduce project completion delays as much as possible, we have worked with contractors to order products well in advance of normal lead times, and we have created a depth of alternate products and sourcing to have at the ready, should supply chains shut down.
Remember, our projects are priced at the time we apply for funding, but awards can take upward of six months, with closings scheduled another six or more months later. That’s a 12-plus month delay. Normally, including an inflation factor in our budgets would suffice, but these are not normal times. Pricing has been changing rapidly on core products like lumber, steel and resins. And some products—like appliances and bathtubs—simply become unavailable months after an order has been placed. All of these issues have meant that, in some cases, contractors won’t lock pricing or commit to schedules until materials arrive on site.
How do you think supply chain and construction challenges will impact affordable housing development in the year ahead?
Johnson: We are starting to see supply chains calming down as the impacts of COVID-19 lessen, although the COVID-19 shutdowns beginning again in Shanghai may foreshadow more disruptions ahead. We will need to keep innovating, which could include the affordable housing industry increasing programs for shared inventory purchasing and warehousing.
Moreover, the biggest impact we can make is to increase our focus on preserving the naturally occurring affordable housing that is being lost faster than we can build new properties. Each year in the Twin Cities, investors buy and quickly upscale around 6,000 units of NOAH, displacing families overnight into a market that is, for all intents and purposes, fully occupied.
Statewide, we only have enough funding for about 2,000 units of new affordable housing per year. Historically, it has been twice as expensive to build new as to preserve NOAH—a premium that will only increase with construction pricing volatility. Simply put, the best way we can buffer ourselves from pricing and supply volatility is to not look solely to building our way out of the housing crisis.
What are the top three trends that will shape the Twin Cities housing market in 2022?
Johnson: The ongoing pandemic and its impact on residents, the disconnect between incomes and housing cost, and limited capital at the correct price point to support affordable housing preservation and production.